Co-ordinated Monetary and Foreign Exchange Intervention

When the monetary authorities wish to target the value of a foreign currency, they may coordinate their intervention in the money and foreign exchange markets. Changes in the monetary aggregates affect the fundamental value of a currency, while intervention in the foreign exchange market signals the central bank's objective. Using a formal analysis, we propose a rationale for the dynamics of intervention by the G-5 in the mid and late eighties, explaining when foreign exchange intervention may be an useful instrument of policy making.

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